Background and Government Funding Competition
Funding for scientific research by life sciences companies is very competitive. In recent years, life sciences companies have applied for and received government grants or collaborated with other universities to receive government grants as a way to stay competitive in the current economic environment. Funding is applied for by the Company and approved by a granting agency, such as the National Institutes of Health (NIH) or many others. The government grants process reimburses companies for expenses incurred in performing Research and Development activities for new technologies.
How to Apply for Government Grants
The U.S Department of Health and Human Services has partnered with Grants.gov, which is a source to find and apply for federal grants. The site has 26 federal grant making agencies that have made 1,000 grant programs worth approximately $500 billion accessible to organizations, including for-profit life sciences companies. The process of applying for a grant and writing a grant proposal is normally a lengthy process as the granting agency must evaluate applications for scientific merit. Grants typically need to carry out a public purpose of support or stimulation authorized by the Government. For life sciences companies, this includes support for enhancing health, extended healthy lifestyle and reducing illness or disability.
Financial Reporting and Accounting for Government Grants Received
There is currently no applicable guidance under U.S. GAAP. As such, International Accounting Standards (IAS) 20 is being followed and used as a guideline in accounting for and in the disclosure of government grants and in the disclosure of other forms of government assistance in the U.S. Under these standards, government grants, including non-monetary grants at fair value, are not recognized until there is reasonable assurance that the entity will comply with conditions related to the grants and that the grants will be received. Government grants may be issued to life sciences companies as a reimbursement to purchase assets or research and development expenses to benefit the company’s research activities.
After meeting the conditions of the grant, IAS 20 identifies two approaches for the accounting of government grants; the capital approach and income approach.
Capital Approach: The capital approach presumes that because government grants are not earned by the company, but rather are incentives provided by the government without any costs, government grants are not recorded as a profit or loss and instead recorded on the balance sheet as deferred income that is recognized as profit or loss over the useful life of an asset or as a reduction to depreciation expense of the related asset.
Income Approach: The income approach is under the assumption that the company earns government grants through compliance and therefore should be recognized as profit or loss in which the expense is incurred. In some cases, grants may be related to non-depreciable assets and would be recorded as profit or loss if fulfillment of required obligations are met. As an example, a grant for funds to be used for research and development activities such as materials and supplies may be recorded as profit or loss upon expenditure.
IAS 20 also requires that entities shall disclose the accounting policy adopted for government grants, nature and extent of government grants, and any obligations that the entity must fulfill.
Other Audit Considerations of Government Grants
For-profit companies are not subject to the "single audit" requirements posed upon nonprofit organizations and government entities under OMB Circular A-133 (A-133). However, there has been an increased request by many federal funding agencies for for-profit companies receiving federal grant funds to have either Yellow Book or Program-Specific Audits as defined below. In these circumstances, the granting agency will write this requirement into the specific grant agreements they have signed with the grantee.
Yellow Book Audits: In many cases, for-profit companies have been requested by granting agencies to undergo grant audits in accordance with "Yellow Book" audits under the Generally Accepted Government Auditing Standards. Under the Yellow Book requirements, the auditor must issue an additional report on internal controls over financial reporting and on compliance and other matters based on the audit of the financial statements in accordance with Government Auditing Standards. The report need not include an opinion on internal controls over financial reporting, but instead addresses that internal control operating effectiveness has been considered. For the most recent Yellow Book, see www.gao.gov.
Program-Specific Audits: Many for-profit life sciences companies only have one federal program. In this case, many federal awarding agencies will allow companies to have a program-specific audit. This audit is less in scope than an A-133 audit and the auditee company can follow the guidelines imposed by the grantor or the OMB Circular A-133. Program-specific audits are conducted in accordance with the Yellow Book.